he proposed policies designed to limit outsourcing. Senator John Edwards, Kerry's running mate, has taken an even harder line. The Bush Administration, despite its ostensible support for trade liberalization, didn't hesitate to impose tariffs on foreign steel to protect domestic producers in swing states such as Ohio and West Virginia. The steel tariffs were eventually removed, after the European Union threatened a trade war, but the United States continues to provide hefty subsidies to dairy farmers, tobacco grow- ers, and other agricultural producers. Given these political realities, it is left to economists to defend free trade, which they tend to do without reservation, re- gardless of political affiliation. For ex- ample, one of Mankiw's predecessors, Martin N. Baily; who served in the Clin- ton Administration, has just co-authored a paper entitled "Exploding the Myths of Offshoring," which echoes Mankiw's arguments almost word for word. De- spite Kerry's tough public stance, many of his economic advisers endorse views similar to Mankiw's and Baily's, as do the vast majority of economic commen- tators. During recent months, the Wall Street Journal, the Financial Times, Busi- ness "Week, Fortune, and The Economist have each published articles pointing out the benefits of outsourcing. Only a few journalists have dared to challenge the received wisdom, most notably CNN's Lou Dobbs, who has been conducting a virulent populist attack on businesses that shift jobs overseas. Surely Dobbs, who left CNN for a while to work at Space.com, hasn't spotted something that the luminaries of the economics profession have missed? Surprisingly enough, he might well have. While outsourcing isn't the only rea- son that businesses are so reluctant to hire American workers-rising productivity and a lack of faith in the recovery are others-it is certainly playing some role, a fact that corporate executives are much more willing to admit than economists are Moreover, economists tend to over- state the theoretical case for outsourcing, arguing that trade liberalization is always and everywhere beneficial, which simply isn't true. In today's world, where multi- national corporations can produce many goods and services practically anywhere, and where investment capital can move from one continent to another at the flick ' .. \ (' .., {\../- . ---. - " , \ ; ' . ---- .- - -- J ';'!i; I ::tt of a switch, there is no economic theory which guarantees that new types of trade, such as outsourcing, automatically bene- fit the United States. Some Americans gain: consrnners, who enjoy lower prices; stockholders, who see profits rising at companies that employ cheap foreign labor. Some Americans lose: workers whose jobs are displaced; the owners of fums whose contracts are transferred to foreign suppliers. But the economists' ar- gument that the country as a whole inev- itably benefits is questionable. A s Mankiw indicated, it was Adam Smith who developed the argu- ment that the unfettered exchange of goods and services allows individuals to specialize in what they do best, thereby " -... , - It ;; ; ! i::; .r .... :t.. r: .r. ME ICO BANKING: - AÝ\ONtC j EtlTE \ Ä\N'fY\t;N"T r-mMO>R? A:& , 1tl . I . 1H:Ð:'.': : . . _.. ,. -:. . \ , i lies at the heart of outsourcing and off- shoring. (The two phrases once had dIs- tinct meanings, but now they are used interchangeably: ) Smith took the logic of specialization and applied it to the international mar- ket, arguing that no country should pro- duce anything it could import more cheaply from abroad. "What is prudence in the conduct of every private family can scarcely be folly in that of a great kingdom," he wrote. This analysis im- plied that countries should concentrate on industries in which they are the low- cost producer, or, in the language of today's economists, industries in which they have an "absolute advantage" over foreign competitors. A classic example involved Lancashire þ .- . :..- ., iP _II _ '" .....p . ' '. " \ At 1ft,. .... . i "I{ I' ...... .- t .. , !... ...,'. - . ' ': .. ::f". _ ." - - -, _ .a a . \\ { " f i/ /. . ;., :; "r';" '.','.' fijDOCUrNfX Açc !i r!.t!Si- tI11;g;[ It lJJ11J1 \. J._ " ....... --"..--- 1-' \ It ...,........ -" '" , ... . , MAURITIUSYS 'To'/t- CtOTHIN ,'II/UIUIQJIIIUI .'.. ..... - I ' '1 -. .; ". ' ;;r '\ ..,.1.... > . " . ., Outsourcing isn't the only reason that Americans are losing J.obs, but it's playing a role. raising over-all income and prosperity: "The taylor does not attempt to make his own shoes, but buys the of the shoemaker," Smith wrote in "The Wealth of Nations," which was published in 1776. "The shoemaker does not attempt to make his own clothes but employs a taylor." It may seem remarkable that economists still refer to the work of a Scottish radical who didn't even call himself an economist-his tide at Glas- gow University was professor of moral philosophy-but the division of labor, which is what Smith was talking about, textile mills, which exploited the damp climate of northern England, and Portu- guese vineyards, which prospered in the southern sun. In the presence of prohib- itive tariffs on imports and exports, which were widespread at the time Smith was writing, England wotÙd have been forced to make its own wine (or go without), and Portugal wotÙd have had to manufacture cloth, which would have wasted valuable resources. But if free trade was introduced each country could concentrate on its strength, with England exchanging its surplus cloth for Portugal's surplus wine, THE NEW YOR.KER., AUGUST 2, 2004- 27